AT&T Comments on the South Africa

Telecommunications Amendment Bill

AT&T Global Network Services South Africa (Pty) Ltd ("AT&T") is pleased to submit the following comments to the Parliamentary Portfolio Committee concerning the Telecommunications Amendment Bill ("the Bill").

AT&T (formerly Trafex (Pty) Ltd) is a deemed value-added network services ("VANS") licensee under the Telecommunications Act, 1996 ("the Act"). AT&T's license stems from several agreements to provide VANS entered into with Telkom SA Limited ("Telkom") in October 1992 under Section 78(2)(a) of the Post Office Act, 1958. AT&T was previously granted a licence to provide VANS by the Postmaster General under Section 78(lA)(b) of the Post Office Act. Pursuant to these licenses, AT&T, or its predecessors, has provided VANS to customers in South Africa since 1985, and presently serves approximately 500 small, medium and large business customers, including leading companies in many key sectors of South Africa's economy, including the banking, brewing, manufacturing, minerals and mining industries.

AT&T concerns: AT&T is greatly concerned that several of the proposed amendments contained in the Bill would make it impossible for competitive VANS suppliers to continue their operations in South Africa and would effectively award a monopoly over VANS to Telkom, the monopoly provider of basic telecommunications services. In addition to causing severe harm to VANS suppliers and their consumer and business customers in South Africa, this legislation would greatly damage the South African economy, which requires a competitive VANS industry to compete in the global information economy of the twenty-first century.

The experience of the United States, the European Union, Chile and other countries over the last thirty years has demonstrated that it is market forces, not monopolists that best encourage new services and low prices in telecommunications, which provides the critical building block for the e-commerce services of the future. If South Africa is to obtain the full benefits of the information economy, it must ensure full and fair competition in the provision of value-added services, which include many services related to the Internet, where no country's interests are adequately served by a monopoly.

No shared customer use of facilities: The Bill would make it impossible for competitive VANS suppliers to serve their customers by prohibiting the shared customer use of facilities used for virtual private networks. It would achieve this result by defining virtual private networks as "private telecommunication networks" -- requiring them to be regulated as such, including the prohibition on shared customer use.

The Bill would also make it impossible for VANS suppliers to obtain the telecommunications facilities they require to provide VANS -- which would also quickly make it impossible for them to continue in business -- by requiring them to obtain facilities from Telkom (and the second national operator) on a reciprocal basis, which is a clear impossibility when Telkom and the second national operator are the only entities authorized by the Act to engage in the provision of telecommunication facilities.

As described below, these proposed amendments would not only cause immense harm to the VANS industry, their customers in South Africa and the South African economy, but would also breach South Africa's WTO obligations to provide market access and national treatment to VANS suppliers, and to meet the requirements of the GATS Annex on Telecommunications.

The Act should prohibit the unilateral denial of facilities: The Act should be amended to prohibit any public switched telecommunications service licensee from engaging in the unilateral denial of facilities, in the way that Telkom has denied facilities to AT&T and other VANS suppliers since September 1999. To prevent such conduct in the future, the Parliament should include an express prohibition on the denial of facilities unless such action is specifically authorized by ICASA.

Other concerns: The Parliament should also reject the proposal to re-name value-added network services as "electronic transaction services," and it should enact the definition of VANS recently proposed by ICASA with the support of the majority of industry and stakeholders. It should also ensure that Sentech is subject to the same requirements as VANS suppliers when it provides similar services. Similarly, Telkom and the second national operator should not be allowed to provide voice over Internet protocol (VOIP) under their VANS licenses unless other VANS suppliers are allowed to do the same.

VANS providers should be allowed to obtain facilities from all authorized providers of telecommunication facilities, including Sentech, and should be required to make universal service contributions only on their annual turnover derived from the value-added portion of VANS.

Other major concerns are the proposed Telecommunications Mediation and Arbitration Committee, which would not be consistent with South Africa's WTO commitment to establish and maintain an independent regulator, and the proposed amendments in the Bill that would extend Telkom's monopoly (and the subsequent duopoly) to include collocation space, racks and cabinets and even the supply of customer-premise telecommunications equipment, such as telephone handsets, desk-top computers, PBXs, and facsimile machines.

Additionally, the proposed amendments allowing only the second national operator to provide resale services before 2005, and only for a two-year period, are not consistent with South Africa's WTO commitments to liberalize resale by 2003 with no limitation on the number of suppliers.

These concerns are described in greater detail below.

Prohibition on Shared Customer Use of Facilities bv VANS Snupliers Usin2 Virtual Private Networks: The Bill proposes major restrictions on the use of telecommunications facilities by VANS suppliers in South Africa that AT&T believes would quickly force them out of business. The Bill would achieve this result by defining the "virtual private network" (VPN) software and technology -- which are used by many VANS suppliers to provide services over network facilities shared among multiple customers -- as a "private telecommunications network" (PTN). VANS suppliers' use of VPNs would thereby become subject to the restrictions placed on PTNs by Section 41 of the Act, which prohibits the shared use of those facilities to provide service to multiple customers.

The proposed amendment to Section 1 of the Act states as follows:

"'virtual private network' means a private telecommunications network that makes

use of the public telecommunications network or other telecommunications facility"

Although the proposed amendments would allow VANS suppliers to "operate virtual private networks without first obtaining a private telecommunication network licence" (see Proposed amendment to Section 41), they would also prohibit VANS suppliers from using VPNs as they do today to provide VANS services to multiple customers over shared facilities. Because VPN technology would be defined as a private telecommunication network," VANS suppliers' use of this technology would be subject to the private telecommunication network restrictions of Section 41, which require the exclusive use of the underlying facilities by a single customer.

This would prevent VANS suppliers from using VPN technology as they do today to provide VANS services to multiple customers over shared network facilities. Instead, VANS suppliers would be required to service each customer over physically separate network facilities -- which would be completely uneconomic. The effect would be to quickly force competitive VANS suppliers out of business in South Africa and create a Telkom monopoly over VANS.

There is no reason to require VANS suppliers, which are governed by Section 40 of the Act, to become subject also to the private telecommunication network restrictions of Section 41, which would effectively remove their ability to provide VANS services as they have traditionally done in South Africa. The South African regulator, ICASA, recently concluded a lengthy inquiry into this issue and rejected Telkom's assertions in that inquiry that VPNs require the same regulatory treatment as private telecommunications networks. Instead, ICASA found that a VPN "has no physical substance" and is rather a "software based technological intervention in the operation of a VANS [1 to ensure certain characteristics (privacy, security, guaranteed levels of availability and reliability) in communications between specified participants." (Notice 1414, Jun. 1, 2001, Sect. 2.2.11)

ICASA further found that although VPNs provide "some of the attributes associated with a PTN, this does not per se mean that the network to which it is applied ipso facto becomes a PTN." (Sect. 3.1. (emphasis added.)) ICASA accordingly concluded that VANS licensees could lawfully provide services to multiple customers over shared infrastructure through use of VPNs. (Sect. 3.3.)

The proposed amendment seeks to reverse this ICASA finding by imposing a statutory definition of VPNs as a PTN. The Parliament should reject this proposed amendment for the following reasons:

Major economic harm in South Africa: South Africa requires a competitive VANS industry to compete in the global information economy of the twenty-first century. VANS suppliers serve thousands of South African corporations and businesses and provide many of the services necessary for the Internet and e-commerce. ICASA recently emphasized that "[ijt is a reality that e-commerce and the demands it makes on availability, reliability and security of any telecommunication service, via the public Internet (a VAN), play an ever increasing role in the South African economy." (Notice 1414, Jun. 1, 2001, Sect. 3.8.) A Telkom monopoly over VANS would mean higher prices, poorer quality service and less consumer choice in South Africa -- the inevitable result of telecom monopolies everywhere -- and limit the future growth of the South African economy.

Breach of South Africa's WTO obligations: South Africa agreed in 1994 to provide market access and national treatment to U.S. and other foreign VANS suppliers to provide VANS services in South Africa over both public and dedicated data networks. (See General Agreement on Trade in Services, South Africa Schedule of Specific Commitments, GATS/SC/78 Apr.1994, pages 12-13.) By limiting VANS suppliers to the use of dedicated networks, the proposed amendment would deny market access, and any different treatment of Telkom would deny national treatment. Also, under the GATS Annex on Telecommunications, South Africa is required to ensure that U.S. VANS suppliers receive "access to and use of public telecommunications transport networks and services on reasonable and non-discriminatory terms and conditions." (GATS Annex on Telecommunications, Sect. 5(a).) The denial of the shared use of public telecommunications transport networks necessary for VANS suppliers to provide services on an economically viable basis in South Africa would be contrary to these obligations.

The Parliament should instead:

1. Delete the proposed definition of "virtual private network" from Section 1(q).

2. Delete proposed Section 41(1) (b) (ii) providing that "Subject to section 40(3), a holder of a value-added network service licence may operate virtual private networks without first obtaining a private telecommunication network licence."

3. Delete the words "including virtual private networks" from proposed Section 36A(l)(h)(iii) (definition of 'public switched telecommunication service').

4. The Parliament should also include the following language in Section 40 of the Act:

"A person who provides a value-added network service may use virtual private network software or technology to provide all services authorized by Section 40 of the Act and shall not be deemed to provide a private telecommunication network and shall not otherwise be subject to section 41 of the Act because of such usage."

Thus, the language of the Bill should expressly state that the VANS supplier that uses a VPN "shall not be deemed to provide a private telecommunication network."

Provision of Facilities by Telkom: The proposed amendments would also make

it impossible for VANS suppliers to obtain the telecommunications facilities they require to provide VANS -- which would also quickly drive them out of business in South Africa. The proposed amendments would achieve this result by requiring Telkom (or the second national operator) to provide facilities to VANS suppliers on a reciprocal basis -- which is clearly impossible when VANS suppliers are prohibited from providing any telecommunication facilities because Telkom (and the second national operator after May 2002) are the only entities authorized by the Act to engage in the provision of telecommunication facilities. Indeed, the very nature of facilities leasing is that it is not reciprocal. Like the prohibition on shared customer use described above, the effect of this proposed amendment would be to give Telkom a monopoly over VANS.

The proposed amendments would further limit the provision of facilities by requiring an ICASA determination that this would promote the "efficient use" of the public network.

To explain further, under the present statute, VANS suppliers are required by Section 40 of the Act to provide value-added network services over facilities "provided by Telkom." Under Sections 43(1)(c) and 44(3) of the Act, a request for such facilities is "not unreasonable where the Authority determines that the requested [provision of facilities] is technically feasible and will promote increased public use of telecommunication services or more efficient use of telecommunication facilities."

Under the proposed amendments, Section 40 of the Act would continue to require VANS suppliers to provide services over facilities "provided by Telkom," or, after 7 May 2002, by Telkom and the second national operator. However, the proposed amendments to Sections 43 and 44 of the Act would deem requests for facilities to be reasonable only where ICASA determined that the provision of the requested facilities "(i) is technically feasible; (ii) will promote the efficient use of the public switched telecommunications network; (ii) can be implemented on a reciprocal basis between the parties." (See proposed amendments 18(a) and 19(b) amending Sections 43 and 44 of the Act (emphasis added).)

These proposed requirements for ICASA findings regarding "efficient use" and "reciprocal" implementation would effectively make it impossible for VANS suppliers to obtain facilities, thus preventing them from expanding their networks, which would soon force them to cease operations in South Africa. In addition to causing the significant harm to the South African economy described above, these amendments would breach South Africa's WTO obligations, which require South Africa to provide market access and national treatment to U.S. and other foreign VANS suppliers. They would also breach the requirements of the WTO Annex on Telecommunications for "access to and use of public telecommunications transport networks and services on reasonable and nondiscriminatory terms and conditions."

For these reasons, the Parliament should reject the proposed amendments to Sections 43(1) and 44(3) of the Act.

The Act Should Prohibit the Unilateral Denial of Facilities for VANS:
The Act should be amended to prohibit any public switched telecommunications licensee from engaging in the unilateral denial of facilities, in the way that Telkom has denied facilities to AT&T and other VANS suppliers since September 1999. To prevent the recurrence of such anticompetitive conduct in the future, the Parliament should include an express prohibition on the denial of facilities unless pursuant to a specific authorization by ICASA.

The Act should be amended to make clear that no public switched telecommunications service licensee may deny facilities to any VANS supplier requesting such facilities pursuant to Sections 40(2) and 44(2) of the Act, unless ICASA has previously determined that the licensee is entitled to terminate or not to supply such facilities to that supplier. The need for the inclusion of such a provision in the Act is demonstrated by the refusal of Telkom to provide necessary facilities to AT&T and other VANS suppliers since September 1999, which has greatly impeded their ability to provide VANS to their customers.

For these reasons, the Parliament should amend Section 44(2) of the Act to insert the words "the Authority has determined that" before "such request is unreasonable" so that Section 44(2) shall read:

"Telkom and any other provider of a public switched telecommunication service shall, when requested by any other person providing a telecommunication service, including a private telecommunication network, lease or otherwise make available telecommunication facilities to such other person pursuant to an agreement to be entered into between the parties, unless the Authority has determined that such request is unreasonable."

The Parliament should also add the following new sentence to Section 44(2) immediately after the language above:

"Telkom or any other provider of a public switched telecommunication service shall not be entitled to withhold the provision of telecommunication facilities and shall lease or otherwise make available the requested facilities to the person making the request until such time as the Authority determines that Telkom or any other provider of a public switched telecommunication service is entitled to terminate, suspend, or not to provide, the requested facilities to the person making the request, including where the reasonableness of any such request is disputed, or the request is otherwise referred to the Authority, or where Telkom or any other provider of a public switched telecommunication service otherwise disputes the lawfulness of the request."

Additionally, several changes to the proposed amendments are necessary to allow VANS suppliers to obtain telecommunication facilities from all new facilities-based providers and resellers that may be authorized in the future.

First, contrary to the proposed amendment to Section 40, there should be no deletion of the existing Section 40(2) provision that facilities shall be provided by Telkom "until a date to be fixed by the Minister." Also, to ensure that VANS suppliers may purchase bandwidth from Sentech for use in providing VANS services to their customers, the words "including to holders of value-added network service licenses" should be added following the words "on a wholesale basis" in subsection (b) of the definition of "carrier of carriers" proposed for inclusion in Section 1.

VANS Definition: The proposed amendments would also limit the scope of the services provided by VANS suppliers by re-naming "value-added network services" in Section 40 of the Act as "electronic transaction services." Because the services provided by VANS suppliers in South Africa for at least the past fifteen years include other types of value-added network services, such as protocol conversion and managed data network services, the Parliament should reject this proposed amendment and retain the existing, intern ati on ally-recognized name for these services.

The Parliament should also follow the recent recommendation by ICASA to amend the statutory definition of value-added network services set forth in Section 40 of the Act. ICASA stated on June 1, 2001 that this proposed definition is the result of "extensive consultation by ICASA and carries the support of the majority of industry and stakeholders." Adoption of this definition proposed by ICASA would make clear that South Africa is fully committed to a competitive VANS industry now and in the future by affirming that competitive VANS suppliers may provide both existing and new value-added network services. It reads as follows:

"'Value-added network service' means a telecommunications services(s) provided by a person over a telecommunications facility, which facility has been obtained by that person in accordance with the provision of section 40(2) of the Act, to one or more customers of that person concurrently, during which value is added for the benefit of customer(s). Such added value can consist of:

· any kind of technological intervention that would act on the content, format, protocol or similar aspects of the signals transmitted or received by the customer(s) in order to provide those customer(s) with additional, different or restructured information, and/or;

· the provision of authorized access to, and interaction with, processes for storing and/or retrieval of text and data, and/or;

· the application of technical resources and managerial skills that would increase the efficiency of the telecommunication facility and achieve the service objectives of the customer(s).

"Without derogating from the generality of this definition, value-added network

services include, but are not limited to:

· electronic data interchange;

· electronic mail'

· protocol conversion;

· access to database or a managed data network service or a virtual private network;

· voice mail

· store-and-forward fax;

· video conferencing;

· telecommunications related publishing and advertising services, whether electronic or print;

· electronic information services, including internet service provision;

any other telecommunication service in respect of which the conveyance of signals is no more than is incidental to, and necessary for, the provision of that service."

VOIP: South Africa's WTO commitments require nondiscriminatory treatment of all VANS suppliers, including Telkom, the second national operator, and any further public switched telecommunications services licensees. This requires that public switched telecommunications services licensees should be allowed to provide VANS only under licenses issued under Section 40 of the Act and should not be allowed to derive unfair advantage over other VANS suppliers through their provision of public switched telecommunications services. Accordingly, Telkom and the second national operator should not be allowed to provide voice over Internet protocol (VOIP) under their VANS licenses unless other VANS suppliers are allowed to do the same. Nor should Telkom and the second national operator be allowed otherwise to derive an unfair competitive advantage over their VANS competitors by packaging voice with VANS services.

Sentech: Proposed Section 32C would grant Sentech a license with effect from May 2002 to provide a "multimedia" service, which is defined to include "internet through television" "electronic transactions (including e-commerce)" and other services similar to value-added network services. (See Proposed Section 32C(1)(b)& amendment to Section 1(i).) However, Sentech is not subject to the express prohibition on voice services, as are VANS suppliers, and is not required to obtain telecommunication facilities from Telkom.

To ensure the nondiscriminatory treatment required by South Africa's WTO commitments, Sentech should be allowed to provide VANS services only pursuant to a VANS license and subject to the same requirements as VANS suppliers. There should also be no restriction on the provision of "multimedia" services by VANS suppliers.

Universal Service Contributions bv VANS Suppliers: The proposed amendment to Section 67 of the Act would require all licensees, including VANS suppliers, to make universal service contributions of not more than 0.5 percent of their annual turnover. However, in most countries, including the United States, VANS providers do not pay universal service contributions at all. As explained below, if such contributions are required from VANS suppliers in South Africa, they should be required only with respect to the annual turnover derived from the value-added portion of VANS.

First, any universal service contribution requirement should not be based on the annual turnover of VANS licensees' operations as a whole, which would include turnover resulting from non-VANS activities of VANS licensees. Indeed, to impose a contribution requirement on the non-VANS revenues of VANS licensees would be no more justified than requiring universal service contributions from companies that were not licensed to provide VANS services at all. The contribution requirement should instead be limited to annual turnover related to the licensed telecommunication services provided by the licensee.

Second, it should be recognized that universal service contributions will already be imposed on public switched telecommunications service licensees' turnover from the basic telecommunications facilities provided to VANS suppliers, and in turn used by VANS suppliers for the provision of VANS to their customers. Therefore, VANS suppliers will be already contributing to universal service through the prices paid for the basic telecommunication facilities used in the provision of VANS. Consequently, the proposed amendment effectively requires VANS suppliers to pay double contributions on the basic telecommunications facilities used to provide their services. In order to avoid twice imposing universal service contributions on the basic telecommunications facilities used by VANS suppliers, the universal service contributions by VANS suppliers should be based only on the turnover derived from the value-added portion of VANS.

For these reason, the proposed amendment to Section 67 should be amended to add the following language after "turnover": "derived from the provision of telecommunication service that it is licensed to provide and, for a holder of a value-added network services licence, shall not exceed 0.5% of a licensee's annual turnover derived from the provision of the value added by the licensee to the telecommunications facility obtained pursuant to Section 40(2) of the Act."

Weakening of ICASA: Proposed new Section 53A would allow the Minister, at the request of any party to "an unresolved dispute," to establish a "Telecommunications Mediation and Arbitration Committee." Under Section 53A(2), "each party to the dispute must agree in writing to be bound" by the committee's decision, which suggests that there would be no appeal of the committee's decision to any court. The three members of the committee are not required to be independent of the parties, would apparently be selected by the Minister, and would be required to "mediate and endeavour to settle" disputes regarding "any license agreement, any terms and condition thereof, and any matter arising therefrom." (Proposed Section 53A(4).)

Adoption of this provision would greatly undercut ICASA's authority to adjudicate all such matters under Section 100 of the Act and would violate South Africa's WTO commitment to establish and maintain an independent regulator. The Parliament should delete proposed Section 53A in its entirety.

Prohibition on Competition in CPE: The proposed amendments would also award Telkom a monopoly over all customer premises equipment (CPE). It would achieve this result by expanding Telkom's monopoly over "public switched telecommunications telecommunication service to include "service comprising the supply of telecommunication equipment on the premises of a customer" (See Proposed new Section 36A(1)(g)), and "the provision, repair and maintenance of equipment located on a customer's premises and any other telecommunications apparatus of any kind" (See Proposed new Section 36A(1)(i)). (See also, Proposed Section 32A(1)(a) ("From 7 May 2002 until 7 May 2005 Telkom and the second national operator shall be the only holders of public switched telecommunications service licences.") This broad language would potentially cover all customer-premises equipment connected to the telecommunications network, including telephone handsets, desk-top computers, PBXs, and facsimile machines.

The creation of a new Telkom monopoly over the critical computer and telecommunications equipment industry would cause immediate and major harm to the South African economy. It would deny South African consumers and businesses the undisputed benefits of competition in the provision of this equipment by raising prices, restricting consumer choice and stifling innovation. This in turn would limit telecommunications and e-commerce services in South Africa, which use this equipment as their means of delivery to, and interaction with, consumer and business users.

The Parliament should delete this language from the proposed new Section 36A.

Expansion of Telkom Monopolv to Include Collocation Space, Racks, Rights of Wav, Conduits and Cabinets: The proposed Bill also expands the monopoly of Telkom to include poles, conduits, rights of way, co-location space, equipment cabinets, racks or areas "used in connection with telecommunication." The proposed amendment to Section 1 of the Act would achieve this result by expanding the definition of "telecommunications facility" -- which VANS suppliers are required by Sections 40 and 44 to obtain from Telkom -- to include these items.

The removal of competitive sources of supply for these items would raise costs for VANS suppliers, which they would be forced to pass on to consumer and business users in South Africa in the form of higher prices. The Parliament should delete this language from the proposed amendment to Section

South Africa's WTO Liberalization Commitments: The proposed amendments allowing only the second national operator to provide resale services before 2005, and only for a two-year period, are not consistent with South Africa's WTO commitment to liberalize resale service by 2003. See Fourth Protocol to the General Agreement on Trade in Services, WTO, 15 Apr., 1997, South Africa - Schedule of Specific Commitments, page 2 ("Liberalization of resale services to take place between 2000 and 2003 with authorities to define terms and conditions").

Although South Africa's WTO commitment states that the Telkom monopoly will be followed by a duopoly in facilities-based services, it makes no reference to any duopoly in resale services. However, the proposed new Section 32A of the Act states that Telkom and the second national operator will be the only holders of public switched telecommunications licenses through May 2005 and that further "service-based competition" from "[a]t least one" other operator will then be licensed. It therefore appears that only the second national operator will be allowed to engage in resale prior to 2005. This is contrary to South Africa's WTO commitments, which allow no limitation on the number of suppliers following the liberalization of resale services by 2003.

Moreover, under the proposed amendments, the second national operator will be allowed to resell Telkom's facilities only for two years after the commencement of its license in May 2002 -- i.e., through May 2004. (See Proposed Section 32A(2)(a).)

Therefore, there will be no resale competition at all in South Africa from May 2004 through May 2005, which is also contrary to South Africa's WTO commitment to liberalize resale services by 2003.

South Africa's WTO commitments also require the completion of the study of further market-opening in facilities-based services one year earlier than the date stated by the proposed amendments. The WTO commitments state: "Authorities to consider by 31/12/03 the feasibility of suppliers in addition to the duopoly." However, the proposed new Section 32A states that the Minister shall make this determination '[blefore 31 December 2004." (See Proposed Section 32A(5)(a).

The Parliament should ensure that South Africa opens its telecommunications market to competition according to the schedule set forth in its WTO commitments.

AT&T requests the opportunity to make an oral submission to the Portfolio Committee and would be pleased to answer any questions concerning these comments.

 

September 19, 2001.